Loosening Fiscal Straitjackets

Proponents say that caps on taxing and spending enhance democracy. In reality, they destroy accountable government -- but that can be changed.

When Justice Louis Brandeis famously called states "laboratories of democracy," he might not have envisioned the out-of-control monstrosities that those laboratories sometimes produce. Case in point: caps or formula-based limits on revenues and spending that many states have adopted over the last three decades, which have undermined public services and stymied activist government.

These measures apply statutory or constitutional limits to how much the state or local governments in the state can collect in revenues and spend on services. They replace the normal give-and-take of legislative decision-making with simplistic formulas often designed to diminish the state's ability to fund education, health care, and other services that help residents and the state prosper. Many of these limits require referenda before taxes can be approved or their terms can be changed. And once set in motion, these fiscal Frankenstein monsters are notoriously hard to stop.

Tax and spending limits exploit general public frustrations and lack of understanding of government; then, by defunding government, they reduce its ability to get the job done, and further heighten that distrust. They also perpetuate a cynical view of how government works, one that disconnects the need for services from how to pay for them.

The good news is that -- with hard work and organization -- these monsters can be slain. Most recently, in Maine and Washington state, voters rejected the formulaic approach, and progressive reform is possible elsewhere. Colorado provides an emblematic case.

Initiatives for whom?
In Colorado, overriding constitutional spending restrictions is called "de-Brucing." This odd term speaks to the influence brought to bear on the finances and politics of states where tax and spending limits can be placed on the ballot by petition. It also speaks to the harm such limits can cause to services essential to public well-being.

De-Brucing is named for Douglas Bruce, who lost a Democratic legislative primary in his native California 30 years ago. Bruce ended up becoming a Republican and moved to Colorado, where he wrote the so-called Taxpayer Bill of Rights or TABOR. Using the initiative system -- which in 24 states puts proposed constitutional or statutory changes on the ballot for voter approval if supporters obtain enough signatures -- Bruce engineered passage of TABOR in 1992, the third time he put it before voters. Proponents said TABOR would curb government excesses by giving the power to raise taxes to the citizenry rather than to their elected representatives, who couldn't be trusted to rein in spending.

TABOR not only requires a public referendum to approve any tax increase but also limits the annual increase in revenues to a formula based on changes in the state's population and cost of living; the state must return any revenues it receives above that limit to taxpayers. This approach created such a fiscal straitjacket that in 2005, Coloradans voted to suspend the TABOR formula and refunds for five years -- but not before the state's performance in areas such as education and health care had plummeted in national rankings. From 2001 to 2002, Colorado even had to stop requiring schoolchildren to be vaccinated because there wasn't any money to pay for it. TABOR is back on the Colorado ballot this year.

Bruce wasn't the first activist to use the initiative system to go after state government. States have allowed voter initiatives ever since South Dakota adopted the process in 1898. Early in the 20th century, though, initiatives were a Progressive Era vehicle for average folks to challenge powerful corporations, which in many places were effectively ruling state governments.

The modern era of voter-mandated tax and spending limits began in 1978, when Proposition 13 in California changed that state's landscape (planting the seeds of today's budget mega-crisis) and gave anti-tax forces in other states a game plan. Few people knew who Howard Jarvis was before his United Organization of Taxpayers got behind Proposition 13. But the 65 percent vote the measure won in June 1978 put Jarvis on the cover of Time magazine and helped propel Ronald Reagan to the White House.

Prop. 13 sharply limited what home-owners and businesses paid in yearly property-tax increases and imposed a constitutional requirement that two-thirds of each house of the Legislature approve any tax increase. The following November, 15 states had anti-tax measures on the ballot. The right was now mobilized behind this newly adapted tool for taking the "elites" out of their traditional role of making tax policy. Opponents of tax and spending limits were flummoxed. How could you be against democracy? President Jimmy Carter reacted to the California vote by calling it "an accurate expression of, first of all, the distrust of government."

As Washington Post columnist David Broder observed in 2000, "The experience with the initiative process at the state level in the last two decades is that wealthy individuals and special interests -- the targets of the Populists and Progressives who brought us the initiative a century ago -- have learned all too well how to subvert the process to their own purposes."

In recent years several national anti-tax, anti-government organizations have come to view state policy, particularly ballot measures, as a promising way to achieve their aims. The biggest players include Grover Norquist's Americans for Tax Reform, Dick Armey's FreedomWorks, Americans for Prosperity, the Club for Growth, and FairTax.org. While Proposition 13 had a strong grass-roots aspect (California's property taxes had been rising rapidly because of the Legislature's failure to pursue tax reform during a period of inflation), these national organizations and their state affiliates have been the major force behind many of the more recent efforts to enact tax and spending limits. They have helped make the term "TABOR" well-known across the country.

The perils of fiscal limits
While tax and spending limits vary from state to state, what draws the anti-government right to Proposition 13 and TABOR–like measures is simply that they prevent government from doing its job effectively. This is a benefit for those who want drastically limited government but is a nuisance for everyone else.

Inflexibility is a major drawback of fiscal limits imposed by initiatives. Voters may believe they will gain control over government through such limits, but actually they will give up control -- to a formula. Representative government has the ability to adapt to new circumstances. A rigid formula cannot. You probably wouldn't want an airplane you're in to fly through a massive storm on autopilot; it's dangerous for government to operate that way, too.

The "one size fits all" nature of formula--based limits can also cause distortions and inequities. Proposition 13, for example, sharply limits property taxes to a certain percentage of a home's assessed value as long as the same owner occupies it, but the house is reassessed as soon as it is sold. As a result, the owners of two identical houses sitting side by side can pay dramatically divergent property-tax bills depending on how long they've owned their house. Clearly, those who benefit from such distortions -- or hope to do so in the future -- would not want the policy changed. That dynamic, in turn, creates what political scientists call veto coalitions -- groups with little in common but that together can block reform.

Tax and spending limits can also have unforeseen consequences over the long term. For example, both Proposition 13 and Massachusetts' Proposition 2 (passed in 1980) aimed to shift somewhat the responsibility for funding schools and local government from local property taxes to state aid. It worked for a while, but over the years neither state had the financial wherewithal to continue large infusions of aid to schools and localities. As a result, California's per-pupil school spending and student performance now trail the national average. And the two-thirds requirement for legislative tax measures has prevented California from solving its current shortfalls.

The TABOR formula of linking revenues to population growth and the cost of living might sound like a reasonable safeguard against runaway spending, but in reality it shrinks government to the point where it can no longer do its job adequately. For one thing, not all segments of a state's population increase at the same rate. In states where groups that require more services -- such as the elderly or school-age children -- are growing faster than the population as a whole, tying revenues to overall population growth limits government's capacity to meet needs.

The cost-of-living component of the TABOR formula also creates big problems. Often, designers of ballot measures choose a version of the Consumer Price Index that reflects the cost of a "market basket of goods" purchased by a typical consumer. But state governments aren't typical consumers. The major items in a state's basket of goods aren't things like groceries but instead are health care, education, and prescription drugs -- all of which tend to increase in price at much higher rates.

In tough economic times, TABOR's limits prove even more insidious because they prevent the state from meeting the increased demand for such services as job training, higher education, and medical assistance. The problems are compounded when a recession weakens revenues to the point where actual state spending in a given year falls below what the TABOR formula permits. Because allowable spending growth (or revenue growth, depending on how a state's restriction is worded) is tied to the prior year's level, that lower-than-permitted level then becomes the new base. As a result, TABOR permanently ratchets down services to their recession levels, preventing the state from recovering to previous levels when the economy improves. Public needs cannot be met that way.

That's exactly what happened in Colorado. Revenues dropped in the recession of the early 2000s, and because of TABOR, the state couldn't restore those revenues when the economy improved. In 2005, voters permanently eliminated the part of the TABOR formula that created the ratchet effect.

Even in good economic times, TABOR tends to keep state spending each year 1 percent to 2 percent below the level needed to maintain services. The impact of this persistent underfunding grows over time. Research shows that if every state had Colorado's TABOR between 1990 and 2004, total spending in 2004 would have been 20 percent less than it was. That adds up to a lot of teachers, health-care workers, police, and fire personnel whom states simply wouldn't have been able to afford.

Unfortunately, tax and spending limits tend to be very difficult and expensive to take off the books once voters realize the problems they cause. Doing so is beyond the purview of legislatures; another public vote is required. Colorado's five-year suspension of the TABOR formula and refunds took an $11.3 million campaign, in this case largely paid for by the state business community that found TABOR was endangering economic development. But in many other cases, such a campaign would be beyond the means of the people hurt most by limits on government taxation and spending.

Fighting back
For the anti-government right, of course, the difficulty of undoing fiscal limitations like TABORs or Prop. 13 is a big part of their allure. Once in place, these measures will run on autopilot, feeding on voter resentment over government's inability to function properly and spitting it back out in increasingly toxic form.

Supporters of ballot measures that limit spending and taxes had high hopes for the 2009 elections. Measures on the ballot in Maine and Washington state were given a good chance of passage following a summer of "tea party" rallies and growing frustration over the deepest recession in most people's lifetime. Norquist, whose Americans for Tax Reform helps bankroll and guide state ballot questions, said, "I think the Maine TABOR will sort of be a spark to other states. ... If Maine, a moderate Northeastern state, says, 'Yes, let's take a look at this,' it then becomes a stronger sell in Arizona and Washington and Oregon and Florida."

But the 2009 voting turned out not to be a reincarnation of the 1970s "tax revolt." In both states the ballot measures lost convincingly. Were the anti-government forces out-mobilized? (They were indeed outspent.) Did they overplay their hand? Is the public coming to more rational judgment about important issues affecting peoples' lives?

It is certainly the case that TABOR forces public discussion about the economic and social benefits of public investments and brings new voices into that discussion. In both Maine and Washington, some business leaders helped in the fight against TABOR, realizing that reduced funding for education, infrastructure, and other core government functions would harm their states' competitiveness. This put them on the same side as public-sector unions, advocates for human services, local elected officials -- Republicans and Democrats alike -- and an array of other voices. If there is one good thing to say about TABOR, it's that it has helped bring together strange bedfellows to fight for responsible budget processes that adequately fund the public sector.

But there is no reason for complacency. The prospect of pumping up voter turnout for the midterm congressional elections should make anti-government ballot initiatives appealing for the right in 2010. There is precedent for this stepped-up activity. During the last midterm elections, in 2006, well-funded right-wing efforts sought to put TABOR questions on the ballot in 16 states. Most of those efforts failed, though, and in the three states where TABOR reached the ballot (Maine, Nebraska, and Oregon) it was defeated.

This year, supporters are circulating petitions or working in the legislatures to put TABOR–like measures on the November ballot in Florida, Arizona, Missouri, Kansas, Minnesota, and Michigan. Also, supporters are pursuing ballot measures to roll back taxes or cap spending or revenues in Maine, Massachusetts, Colorado, Montana, Florida, North Dakota, and Arizona.

Their recent defeats notwithstanding, backers of state tax and spending restrictions cannot be ignored. Three decades after Proposition 13, anti-government activists are still trying -- sometimes successfully -- to impose limits they might not otherwise achieve through the normal legislative process. Their facile rhetoric about bloated government taking money from citizens that it can't be trusted to spend effectively has the potential to be as mesmerizing as it is polarizing.

About the Author

Iris J. Lav is a senior adviser to the Center on Budget and Policy Priorities and former deputy director of the center.